Friday, March 8, 2019

The Christmas Correction helped seniors

Economic reports are coming in as we try to measure where we have been and use that to help determine where we are going.   Today the Wall Street Journal reported  "Household Net Worth Fell Late Last Year."

Here is my take on that headline. Yes Net Worth fell if you are measuring the value of retirement holdings in stocks.  Even if you think you are not in the stock market you are.  Every teacher's pension plan or state retirement plan is invested in "the market."

Without any action on your part, you got a gift when the market tanked at the end of 2018 if you are over 70 and 1/2 years of age.  Seventy and a half is when you have to pay the piper for all the money you saved in a qualified retirement account without paying tax on it.

Regulations demand Required Minimal Distributions from individual retirement accounts to make sure you pay tax on the money you saved for your retirement and which you must then distribute to youself as income.  Regulations allow you to save money on which you didn't pay tax and now you must pay tax on the distribution.

As you age the percent you are required to distribute to yourself goes up and therefore your taxable income goes up.

The market tanked at the end of the year which means that:

  • Retirement Account Values used to determine the income you must distribute lost value.
  • Taxable income as a percent of the retirement account value is less.
  • Combined with charitable giving, your 2019 tax bill can be positively affected.

Reducing the size of your portfolio is hardly considered a good thing but there are exceptions.  When you fund a charity with a gift from your qualified retirement, you reduce the value of your retirement plan.  Sending money directly to one or more charities of your choice means the value of your retirement plan goes down by the amount you sent to charity.  And therefore, the amount of money you must distribute as income would be less.

Since your income tax rate is determined by the amount of taxable income, you can see using charitable giving to reduce the value of your account and therefore the amount you are taxed will affect your tax rate.

This year we had an anomaly.  The market tanked just before the date at which we value our retirement funds.  With stock market values going down at the end of the year we will have to distribute less as income during 2019 than we would with the normal "Santa Claus" rally.

Charitable transfers are an active process but this little gift required no work.  We income investors know that long term, the market will come back and indeed the market has recovered much of that odd sell off.

If you were clever enough to fund your charitable obligations through Retirement distributions, you got a double holiday gift:  a market swoon just when we could use it that reduces your account value and next year's taxable income and decrease in your account value from the charitable gift.

M* Money Madam